Oaktree Specialty Lending (OCSL)

Business development company Oaktree Specialty Lending (NASDAQ:OCSL) beat Wall Street’s revenue expectations in Q3 CY2025, but sales fell by 18.3% year on year to $77.32 million. Its GAAP profit of $0.28 per share decreased from $0.45 in the same quarter last year.

Company Overview

Managed by Oaktree Capital Management, one of the world's premier alternative investment firms, Oaktree Specialty Lending (NASDAQ:OCSL) is a business development company that provides customized financing solutions to mid-market companies across various industries.

Specialty finance companies provide targeted lending or financial services for specific industries or needs. They benefit from expertise in particular sectors, often reduced competition in specialized niches, and tailored underwriting that can yield higher margins. Challenges include concentration risk in specific industries, difficulty achieving scale efficiencies, and potential vulnerability during sector-specific downturns affecting their specialized markets.

Oaktree Specialty Lending competes with other publicly traded business development companies including Ares Capital Corporation (NASDAQ:ARCC), FS KKR Capital Corp. (NYSE:FSK), and Main Street Capital Corporation (NYSE:MAIN), as well as private credit funds managed by large asset managers.

A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Oaktree Specialty Lending grew its revenue at an impressive 17.2% compounded annual growth rate. Its growth beat the average financials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within financials, a half-decade historical view may miss recent interest rate changes and market returns. Oaktree Specialty Lending’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 8.6% over the last two years. Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

This quarter, Oaktree Specialty Lending’s revenue fell by 18.3% year on year to $77.32 million but beat Wall Street’s estimates by 1.1%.

Assets Under Management (AUM) represents the total value of investments that a financial institution manages for its clients. These assets generate steady income through management fees, creating predictable revenue streams that remain stable so long as clients remain invested with the firm.

Oaktree Specialty Lending’s AUM has grown at an annual rate of 13.7% over the last five years, a step above the broader financials industry but slower than its total revenue. When analyzing Oaktree Specialty Lending’s AUM over the last two years, we can see its assets dropped by 1.9% annually. Other parts of the business were even bigger detractors of growth than fundraising or short-term investment performance over this shorter period since assets outperformed total revenue. But again, we put less weight on asset growth given how lumpy and cyclical it can be.

Oaktree Specialty Lending’s AUM punched in at $2.85 billion this quarter, falling 1.2% short of analysts’ expectations. This print was 5.7% lower than the same quarter last year.

Revenue growth is one major determinant of business quality, and the efficiency of operations is another. For Specialty Finance companies, we look at pre-tax profit rather than the operating margin that defines sectors such as consumer, tech, and industrials.

Financials companies manage interest-bearing assets and liabilities, making the interest income and expenses included in pre-tax profit essential to their profit calculation. Taxes, being external factors beyond management control, are appropriately excluded from this alternative margin measure.

Over the last five years, Oaktree Specialty Lending’s pre-tax profit margin has risen by 23.2 percentage points, going from 114% to 3%. It has also declined by 28.4 percentage points on a two-year basis, showing its expenses have consistently increased at a faster rate than revenue. This usually raises questions unless the company is in high-growth mode and reinvesting its profits into attractive ventures.

Oaktree Specialty Lending’s pre-tax profit margin came in at negative 0.3% this quarter. This result was 38.6 percentage points worse than the same quarter last year.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Oaktree Specialty Lending, its EPS declined by 14.5% annually over the last five years while its revenue grew by 17.2%. This tells us the company became less profitable on a per-share basis as it expanded.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Oaktree Specialty Lending, its two-year annual EPS declines of 50.9% show it’s continued to underperform. These results were bad no matter how you slice the data.

In Q3, Oaktree Specialty Lending reported EPS of $0.28, down from $0.45 in the same quarter last year. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

Financial firms are valued based on their balance sheet strength and ability to compound book value across diverse business lines.

Because of this, tangible book value per share (TBVPS) emerges as the critical performance benchmark for the sector. This metric captures real, liquid net worth per share that reflects the institution’s overall financial health across all business lines. On the other hand, EPS is often distorted by the diverse nature of operations, mergers, and various accounting treatments across different business units. Book value provides clearer performance insights.

Oaktree Specialty Lending’s TBVPS declined at a 3.1% annual clip over the last five years. A turnaround doesn’t seem to be in sight as its TBVPS also dropped by 7.9% annually over the last two years ($19.63 to $16.64 per share).

Return on equity (ROE) measures how effectively banks generate profit from each dollar of shareholder equity - a critical funding source. High-ROE institutions typically compound shareholder wealth faster over time through retained earnings, share repurchases, and dividend payments.

Over the last five years, Oaktree Specialty Lending has averaged an ROE of 7.6%, uninspiring for a company operating in a sector where the average shakes out around 10%.

The debt-to-equity ratio is a widely used measure to assess a company's balance sheet health. A higher ratio means that a business aggressively financed its growth with debt. This can result in higher earnings (if the borrowed funds are invested profitably) but also increases risk.

If debt levels are too high, there could be difficulties in meeting obligations, especially during economic downturns or periods of rising interest rates if the debt has variable-rate payments.

Oaktree Specialty Lending currently has $1.49 billion of debt and $1.47 billion of shareholder's equity on its balance sheet, and over the past four quarters, has averaged a debt-to-equity ratio of 1×. We think this is safe and raises no red flags. In general, we’re comfortable with any ratio below 3.5× for a financials business.

It was good to see Oaktree Specialty Lending narrowly top analysts’ revenue expectations this quarter. On the other hand, its AUM slightly missed. Overall, this print was mixed. The stock remained flat at $13.33 immediately after reporting.

Updated: December 3, 2025 at 11:54 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Oaktree Specialty Lending.

Oaktree Specialty Lending falls short of our quality standards. Although its revenue growth was impressive over the last five years, it’s expected to deteriorate over the next 12 months and its declining pre-tax profit margin shows the business has become less efficient. And while the company’s AUM growth was solid over the last five years, the downside is its TBVPS has declined over the last five years.

Oaktree Specialty Lending’s forward price-to-sales ratio is 4x. The market typically values companies like Oaktree Specialty Lending based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere.